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Wednesday, March 15, 2017

Republican reformers have repeatedly promised affordable healthcare
for all Americans — doubly affordable, in fact. They promise to put
premiums and out-of-pocket costs within reach of low- and middle-income
consumers, and at the same time, that the plan will be affordable to the
federal budget, even given the constraints their most conservative
members would like to impose on federal revenues.

Unfortunately,
the American Health Care Act (AHCA) now before Congress will make
healthcare affordable in the budgetary sense only while making it less
affordable in the individual sense. According to analysis by the Congressional Budget Office,
the AHCA will reduce the budget deficit by $337 billion over a ten-year
period, but only at the expense of reducing the number of insured by 14
million in the near term and by 24 million after the full effects of
the bill come into force. As the CBO points out, even many people who
retain coverage will find it more expensive because the ACHA tax credits
will be less than the subsidies available through exchanges under the
current Affordable Care Act (ACA or "Obamacare"). For others, the only
option that will become more “affordable” is that of going without
insurance, due to the ACHA’s elimination of the ACA’s individual
mandate.

Under the ACHA or ACA, one uncomfortable fact remains
unavoidable: There is no way to make healthcare affordable for either
the budget or individuals without strong action to control prices for
drugs, medical devices, hospitals, and doctors’ fees that are higher
than in any other country. The current draft of the ACHA does nothing to
deal with that critical problem.

Monday, March 13, 2017

Although there is a clear lack of will to do much about climate change at the federal level, California is another story. In a recent poll, 69 percent of California voters backed policies to cut emissions. The latest sign of enthusiasm is a bill
introduced by State Senate leader Kevin De León that would completely
decarbonize the state's electric grid by 2045. Currently, California
state law calls for half of all retail electricity to be produced from
renewable sources by 2030, with an intermediate goal of 25 percent by
2016, reached slightly ahead of schedule.

Is 100 percent decarbonization feasible? Anne C. Mulkern, writing for E&E News,
reports that several experts she talked to said it was. Utility
executives were somewhat more skeptical, but Pedro Pizarro, CEO of
Edison International, agreed that 100 percent renewable power was
technically possible, while expessing concerns about reliability, and
timing.

Even if the goal is technically it possible, though, does
it make sense to mandate a goal of 100 percent renewable electric power
by a certain date? In my view, it does not. Carbon pricing remains a
better tool for reducing California's carbon footprint.

Carbon pricing California style

But,
you might say, hasn't California already tried carbon pricing with its
flagship cap-and-trade scheme? Yes, and it isn't working very well.
However, if we look carefully, we will see that the problems arise from
circumstances particular to the state, rather than from any inherent
flaw in carbon pricing as a concept.

The economic reasoning behind
cap-and-trade is to give companies an incentive to reduce emissions by
requiring them to buy a permit for each ton of carbon dioxide they emit.
The higher the price of permits, the greater the incentive. Prices are
set by monthly auctions supplemented by a secondary market, in which
permits can change hands privately.

Wednesday, March 8, 2017

On March 6, the Republican House leadership finally released a draft
plan for repealing and replacing the Affordable Care Act (ACA). Although
only a draft, it has already earned the name of "Ryancare." As this is
written, with the ink not yet dry, it already is running into political trouble. Influential Republicans are dismissing it as a “framework for reform” or a “work in progress.”

Still, it
is not too early to address one question that will demand an answer no
matter what happens to this early draft: will it, or any replacement for
the replacement, stop the impending death spiral in the individual
insurance market that is at the heart of the ACA’s problems?

From what we know of Ryancare so far, the answer is “No.” Here is why.

What is the “death spiral”?

Just
how does this notorious “death spiral” work? Start with a basic truth: A
private insurer can profitably offer healthcare coverage to a pool of
customers only if it can find a premium that is low enough to be
affordable, yet high enough to cover expected claims and administrative
costs, with enough left over to keep shareholders happy. In order for
that to happen, the pool of customers must contain enough healthy people
to keep claims and premiums low.

Thursday, March 2, 2017

As the stock market soars to one record high after another, analysts
do not hesitate to tell us why. One popular explanation is that expectations of
higher interest rates are pushing up the stocks of banks and other financial
companies(example). Yet
not so long ago, the same analysts were telling us that Wall Street in general
and banks in particular were getting rich on the “free money” that the Fed was
supplying to them at historically low
rates (examples here
and here).
What gives?

To understand how interest rates affect bank profits, we turn
to a wonky concept of financial economics known as the duration gap. Setting the precise mathematics to one side (read
this if you really care), the duration gap refers to the difference between
the maturity of a bank’s assets and its liabilities. If a bank funds itself
with from short-term sources like deposits and uses those funds to make fixed
rate mortgage loans or buy long-term bonds, then it has a positive duration
gap. Interest rates tend to be higher on long-term financial instruments than
on those with short maturities, so is the way banks traditionally made a
profit.

The downside of the traditional banking model is that a positive
duration gap means that profits fall when interest rates rise. Suppose, for example, that your bank makes 30-year
fixed-rate mortgages and funds them with deposits that pay an interest equal to
the federal funds rate (the rate on overnight loans that the Fed uses at its
primary interest rate target). If the loans earn 4 percent and the fed funds
rate is 0.5 percent, you have a nice spread of 3.5 percentbetween return on assets and cost of funds, allowing
a good profit even after deducting operating
expenses.However, if short-term rates
went up, your bank would be in trouble. If the fed funds rate went up to 2
percent while your old fixed-rate mortgages still brought in just 4 percent
your spread would be cut to 1.5 percent and your profits, after operating
expenses, might evaporate altogether.

The budget proposals being prepared by the Office of Management and Budget incorporate revenue estimates based on GDP growth rates of 3 percent or more.

The proposals include across-the-board decreases in nondefense discretionary spending

Such cuts will make it difficult to reverse the long decline in government investment, casting doubt on the likelihood of achieving ambitious growth estimates.

Government investment at all levels accounts for only
about 15 percent of gross fixed investment in the United States, but its
economic significance is greater than that modest share suggests.
Government investment affects investors in private industry in several
ways through its impacts on growth of the economy as a whole, on
suppliers of construction services and materials for government
investment projects, and on users of government infrastructure. Negative
trends in government investment raise concerns for all of these
reasons.

Three charts reveal the extent of these
negative trends. The first chart takes a long-term look at gross
investment in fixed assets at all levels of government. It shows that
total government investment has fallen by about half since the 1960s.
Investment at the federal level and at the state and local levels
contribute roughly equal shares of the total, but the federal share has
fallen more rapidly. Federal gross investment in fixed assets as a share
of GDP in 2015 was just a third of its 1961 peak value. >>>

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